New Zealand Property Investment by Foreigners - Taxation

TAXATION IMPLICATIONS OF INVESTING IN NEW ZEALAND

TAX ISSUES FOR INTENDING MIGRANTS

If you wish to become a permanent resident then you will need to apply to the New Zealand Government. Tax residency is not dependent upon permanent residency for immigration purposes and could be triggered prior to becoming a permanent resident.

Prior to becoming a New Zealand tax resident there are many tax issues to consider. These include:

• Any company under your control will also become a New Zealand tax resident;
• Any offshore trust that you or your spouse have funded or assisted will become a New Zealand tax resident. You have a 12-month period from the time at which you become a New Zealand tax resident to elect for the trust to become a New Zealand taxpayer. Failure to do so will result in distributions from the trust to a New Zealand resident possibly being taxed at 45%;
• The possible taxation of unrealised gains on investments, foreign life insurance policies, overseas pension funds and companies that you control in jurisdictions outside New Zealand; and
• The need to value in New Zealand dollars any fixed interest investments, term deposits and debts denominated in a foreign currency.
• Whether or not you are entitled to the Transitional Residents Exemption
   

INCOME TAXATION

Introduction

If an individual is a resident in New Zealand he or she must pay New Zealand income tax on his or her worldwide income. If an individual is a non-resident in New Zealand he or she pays New Zealand income tax only on income that has a source in New Zealand.

Resident or Non-Resident?

The residency tests differ between individuals and companies. The general tests relate to the degree of physical presence in New Zealand or ongoing relationship with the New Zealand business activity. It is critical to establish your status prior to commencing business or acquiring a home here.

There is a concession for most foreign income derived by migrants or certain returning New Zealanders who have been non tax residents of New Zealand for at least ten years.

Rates of Income Tax

Personal Income Tax Rates (Rate of Tax for every $1)

Taxable income up to $14,000	– 12.5%
Taxable incomefrom $14,001 to $48,000	– 21%
Taxable income from $48,001 to $70,000	– 33%
Taxable income above $70,001	– 38%

Corporate Income Tax Rates

New Zealand resident company	– 30%
Non-resident company	– 30%

Trusts

Complying – 33%
Distributions of income to beneficiaries are taxed at the beneficiaries' own marginal rates.

Taxable distributions from Foreign or Non Complying Trusts may be subject to higher tax rates.

These rates are subject to modification by Double Tax Agreements (DTA’s) between the New Zealand Government and a number of countries (34 at last count). There is also foreign investor tax credit regime for overseas investors living in a country subject to a DTA which effectively reduces the imputation credits with non resident withholding tax (NRWT). This can be beneficial if the investor is able to receive relief for this NRWT in their own country.
Non-Resident Withholding Tax (NRWT)

Interest and Royalties 15% (or 10% where a DTA applies).
Dividends 30% (or 15% where a DTA applies).

Since August 1, 1991 New Zealand borrowers have been able to apply for exemption from payment to non-residents of the withholding tax and instead pay a levy set at 2% of their interest payments. As a result of the levy payment, no New Zealand tax will be payable for the foreign lender. Otherwise NRWT is payable. This only applies to loans from non-associated parties.

There is a New Zealand NRWT liability to the New Zealand Government on interest paid in respect of borrowings in relation to land including where a non-resident pays interest to a foreign bank.

CAPITAL GAINS

There is currently no capital gains tax imposed in New Zealand, but some capital gains are taxed as income.

For example, tax is not payable on profits arising from real property sales unless:

the land is acquired for the specific purpose of resale;
the owner is a dealer in land;
the owner is a land developer;
the owner is a builder;
the land has been re-zoned; or
the land is under a scheme of subdivision or development.

Taxable income can arise if the land is acquired by an associated person of a developer or builder and sold within 10 years of acquisition.

Any profit from the purchase and subsequent sale of a commercial property will ordinarily be a tax-free capital gain, although there may be a recovery of depreciation claimed as a deduction in earlier years.

OTHER TAXES & DUTIES

Local Authority rates are the only property tax, which fund water, sewage and other local body costs.

Gifts of property or money other than by testamentary disposition (under a will) may result in a liability for Gift Duty. This may be more of an issue if you become domiciled in New Zealand or gift New Zealand assets.

GOODS AND SERVICES TAX (GST)

GST is a tax on the consumption of most goods and services in New Zealand. The current standard rate of GST is 12.5%. Anyone who carries on a "taxable activity" may register with the Government as a collector of GST (please note if your gross turnover is, or is expected to be, more than $60,000 in a 12-month period you must register).

Some activities are excluded from the definition of taxable activity and are therefore not liable to GST. Examples of these include working for salaries or wages, being a company director, letting a property for domestic use, financial services etc. There are no broad exemptions for food or other essential goods or services (other than domestic dwellings).

GST is a consumption tax like VAT (Value Added Tax). Therefore, the final consumer bears the tax. At each stage of a transaction (e.g. producer, wholesaler, retailer) those registered business taxpayers collect GST for the Government, after calculating a credit for GST they have incurred on their purchases and pay the net amount across to the Government. While this system may appear cumbersome in reality it is a relatively simple process to administer and comply with.

Export goods and services are taxable at a rate of zero percent. That is, no GST is charged but GST costs may be recovered.

GST is also imposed on goods imported into New Zealand, at the customs point of entry. The Government recently announced a proposal to impose GST on imported services.

An Example of Income Tax and GST Implications on an Individual Investing in New Zealand An overseas individual purchases a commercial rental property in New Zealand for $750,000 plus GST – i.e. $843,750. An apartment under a formal lease arrangement or management contract with a management company may fall within the definition of a commercial property. The annual gross rental from the property is expected to be $65,000 plus GST with expenses of $20,000 plus GST. What are the tax implications? Income Tax Income tax would be payable by an individual on the net GST exclusive income of $45,000 as follows: 14,000 @  12.5% = $ 1,750.00 31,000 @  21% = $ 6,510.00  Total income Tax $8,260.00 This is a first and final tax in New Zealand. Tax paid in New Zealand may be allowed as a credit against tax payable in respect of that New Zealand income in the particular country of residence. This is subject to the laws of the country in force at the time and a credit would generally only be allowed against the additional income tax arising from returning of the New Zealand net rental income in their own tax jurisdiction. GST Because the annual gross rental of $65,000 is above the compulsory GST registration level of $60,000 and the individual is not operating an exempt activity then they must register for GST in New Zealand. This means that GST is accounted for on rental income and  business expenses that include GST. On a regular basis, e.g. one, two or six monthly, GST returns must be filed with the IRD detailing the difference between GST collected on rents and GST incurred on expenses. This difference is then paid or refunded by the IRD. A GST claim can be made for all supplies used in the business taxable activity that contain a GST element. In this case it would include a GST claim on the purchase of the commercial rental property (this is subject to some special conditions). This would equate to 1/9th of the GST inclusive purchase price i.e. $93,750 (this equates to GST at 12.5% on $750,000). This opportunity for claiming the GST element on the acquisition of business assets may result in a significant cash flow advantage when considering investing in New Zealand. When these business assets are ultimately disposed of (or on the cessation of the taxable activity) GST will have to be returned on the disposal of the assets at 1/9th of the GST inclusive value. Please note there are special rules not discussed here such as the zero rating of a "going concern" between two GST registered parties. This may apply to the purchase of a managed apartment. Care needs to be taken (or advice sought) before entering into a contract to buy such property. DISCLAIMER This is a general summary of the rules in effect on 1 April 2009. As the tax treatment is dependent on an individual’s circumstances and the specific facts involved we recommend that you seek specific advice from a specialist tax advisor. For further information or enquiries please contact: Chartered Accountants and International Investment Advisors »

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